[2015] UKSC 72; [2015] WLR (D) 501

A term would only be implied into a detailed commercial contract if its implication were necessary to give business efficacy to the contract or so obvious that went without saying. Rent payable in advance was not apportionable in time at common law or under statute and, therefore, it would be wrong, save in a very clear case, to attribute to a landlord and a tenant an intention that the tenant should be able, upon termination of the lease under a break clause, to recover rent payable and paid in advance which was attributable to the period after the break date.

The Supreme Court so held in dismissing an appeal by the claimant tenant, Marks and Spencer plc, against the decision of the Court of Appeal (Arden, Jackson and Fulford LJJ) [2014] EWCA Civ 603; [2014] CN 903 to overturn the decision of Morgan J [2013] EWHC 1279 (Ch); [2013] CN 827 that there was an implied term in a lease entered with the defendants, BNP Paribas Securities Services Trust Co (Jersey) Ltd and BNP Paribas Securities Services Trust Co Ltd, that the tenant was entitled, upon termination of the lease under a break clause, to recover rent which was payable and had been paid in advance but was attributable to the period after the break date.

LORD NEUBERGER OF ABBOTSBURY PSC (with whom LORD SUMPTION and LORD HODGE JJSC agreed) said that there was no provision in the lease which expressly obliged the landlords to pay the apportioned sum to the tenant and, therefore, in order to succeed the tenant had to establish that such an obligation had to be implied into the lease. There had been many judicial observations as to the nature of the requirements which had to be satisfied before a term could be implied into a detailed commercial contract. In BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 52 ALJR 20, 26, Lord Simon of Glaisdale had said: “For a term to be implied, the following conditions (which may overlap) must be satisfied: (1) it must be reasonable and equitable; (2) it must be necessary to give business efficacy to the contract, so that no term will be implied if the contract is effective without it; (3) it must be so obvious that ‘it goes without saying’; (4) it must be capable of clear expression; (5) it must not contradict any express term of the contract”: see also Philips Electronique Grand Public SA v British Sky Broadcasting Ltd [1995] EMLR 472, 481 and Atkins International HA v Islamic Republic of Iran Shipping Lines (The APJ Priti) [1987] 2 Lloyd’s Rep 37, 42. Those judicial observations represented a clear, consistent and principled approach. It could be dangerous to reformulate the principles, but his Lordship would add six comments. First, the implication of a term was not critically dependent on proof of an actual intention of the parties when negotiating the contract. If one approached the question by reference to what the parties would have agreed, one was not strictly concerned with the hypothetical answer of the actual parties, but with that of notional reasonable people in the position of the parties at the time at which they were contracting. Secondly, a term should not be implied into a detailed commercial contract merely because it appeared fair or merely because one considered that the parties would have agreed it if it had been suggested to them. Those were necessary but not sufficient grounds for including a term. However, and thirdly, it was questionable whether reasonableness and equitableness would usually, if ever, add anything: if a term satisfied the other requirements, it was hard to think that it would not be reasonable and equitable. Fourthly, although Lord Simon’s requirements were otherwise cumulative, business necessity and obviousness could be alternatives in the sense that only one of them needed to be satisfied, although his Lordship suspected that in practice it would be a rare case where only one of those two requirements would be satisfied. Fifthly, if one approached the issue by reference to the officious bystander, it was vital to formulate the question to be posed by him with the utmost care. Sixthly, necessity for business efficacy involved a value judgment. The test was not one of “absolute necessity”, not least because the necessity was judged by reference to business efficacy. It might well be that a more helpful way of putting the requirement was that a term could only be implied if, without the term, the contract would lack commercial or practical coherence.

In Attorney General of Belize v Belize Telecom Ltd [2009] 1 WLR 1988 Lord Hoffmann suggested that the process of implying terms into a contract was part of the exercise of the construction, or interpretation, of the contract. In summary, at para 21, he said that “There is only one question: is that what the instrument, read as a whole against the relevant background, would reasonably be understood to mean?” There were two points to be made about that observation. First, the notion that a term would be implied if a reasonable reader of the contract, knowing all its provisions and the surrounding circumstances, would understand it to be implied was quite acceptable, provided that (i) the reasonable reader was treated as reading the contract at the time it was made and (ii) he would consider the term to be so obvious as to go without saying or to be necessary for business efficacy. It was necessary to emphasise that there had been no dilution of the requirements which had to be satisfied before a term would be implied, because it was apparent that the Belize Telecom case had been interpreted by both academic lawyers and judges as having changed the law. The second point concerned the suggestion that the process of implying a term was part of the exercise of interpretation. Lord Hoffmann’s analysis could obscure the fact that construing the words used and implying additional words were different processes governed by different rules. In most, possibly all, disputes about whether a term should be implied into a contract, it was only after the process of construing the express words was complete that the issue of an implied term fell to be considered.

In the present case, there was a powerful case for contending that it was necessary for business efficacy that the term contended for by the tenant should be implied into the lease. However, it was also necessary to consider the established legal background against which the lease had been entered into, and in particular the general attitude of the law to the apportionability of rent payable in advance. It had long been well established that rent, whether payable in arrear or advance, was not apportionable in time at common law. Section 2 of the Apportionment Act 1870, which provided that “All rents” should “be considered as accruing from day to day, and shall be apportionable in respect of time accordingly”, applied to rent payable in arrear. However, in Ellis v Rowbotham [1900] 1 QB 740, the Court of Appeal held that the Act did not apply to rent payable in advance and, ever since then, it had been assumed that that was the law. His Lordship was satisfied that the Ellis case should be approved. It followed that neither the common law nor statute apportioned rent in advance on a time basis. The fact that the lease had been negotiated against the background of a clear, general (and correct) understanding that rent payable in advance was not apportionable in time raised a real problem for the argument that a term could be implied into the lease that it should be effectively apportionable if the lease were prematurely determined in accordance with its terms. Save in a very clear case indeed, it would be wrong to attribute to a landlord and a tenant, particularly when they had entered into a full and professionally drafted lease, an intention that the tenant should receive an apportioned part of the rent payable and paid in advance, when the non-apportionability of such rent had been so long and clearly established. Accordingly, the tenant’s claim should fail.

LORD CLARKE OF STONE-CUM-EBONY JSC gave a concurring judgment.

LORD CARNWATH JSC agreed that the appeal should be dismissed but added brief comments on the issue of implied terms, saying that he regarded the Belize Telecom case as a valuable and illuminating synthesis of the factors which should guide the court.

Appearances

Guy Fetherstonhaugh QC and Kester Lees (instructed by King & Wood Mallesons LLP) for the tenant.